MODULE 2 Financial Rehabilitation and Insolvency PDF

MODULE 2 Financial Rehabilitation ======================== and Insolvency ============== *(Republic Act No. 10142)* ========================== Accountancy Department College of Business Administration and Accountancy De La Salle University -- Dasmariñas **COURSE LEARNING OUTCOMES:** By the e...

MODULE 2 Financial Rehabilitation ======================== and Insolvency ============== *(Republic Act No. 10142)* ========================== Accountancy Department College of Business Administration and Accountancy De La Salle University -- Dasmariñas **COURSE LEARNING OUTCOMES:** By the end of this course, students are expected to: **CLO1**. Discuss the applicable Philippine laws covering various business transactions, specifically on consumer protection, financial rehabilitation, competition, government procurement, banking, insurance, and labor or employment. **CLO2.** Resolve the problems and conflicts arising from business transactions through the application of pertinent Philippine laws. **CLO3**. Explain the rights, duties, and obligations of the stakeholders as well as the role of the government in handling the issues on business regulations. **CLO4. **Identify the procedural requirements observed by the government regulatory bodies in resolving conflicts or cases involving business transactions. **CLO5.** Correlate the Philippine regulatory laws on business transactions with the work-related areas of the accountancy profession.  ***Financial Rehabilitation and Insolvency Act*** ***(FRIA) of 2010*** **Republic Act No. 10142** Financially distressed companies - Business rescue or liquidation? *Declaration of Policy* It is the policy of the State to **encourage debtors**, both juridical and natural persons, and their **creditors** to collectively and realistically **resolve** and adjust competing claims and property rights. In furtherance thereof, the State shall ensure a timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors. The rehabilitation or liquidation shall be made with a view to ensure or maintain certainly and predictability in commercial affairs, preserve and maximize the value of the assets of these debtors, recognize creditor rights and respect priority of claims, and ensure equitable treatment of creditors who are similarly situated. When rehabilitation is not feasible, it is in the interest of the State to facilities a speedy and orderly liquidation of these debtor\'s assets and the settlement of their obligations. *Definition of Terms.* ***Affiliate*** - shall refer to a corporation that directly or indirectly, through one or more intermediaries, is controlled by, or is under the common control of another corporation. ***Claim***  - shall refer to all claims or demands of whatever nature or character against the debtor or its property, whether for money or otherwise, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, including, but not limited to; (1) all claims of the government, whether national or local, including taxes, tariffs and customs duties; and (2) claims against directors and officers of the debtor arising from acts done in the discharge of their functions falling within the scope of their authority: *Provided,* That, this inclusion does not prohibit the creditors or third parties from filing cases against the directors and officers acting in their personal capacities. *Commencement date* - shall refer to the date on which the court issues the Commencement Order, which shall be retroactive to the date of filing of the petition for voluntary or involuntary proceedings. *Commencement Order -* shall refer to the order issued by the court under Section 16 of this Act. *Control* - shall refer to the power of a parent corporation to direct or govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries or affiliates, more than one-half (1/2) of the voting power of an enterprise unless, in exceptional circumstances, it can clearly be demonstrated that such ownership does not constitute control. Control also exists even when the parent owns one-half (1/2) or less of the voting power of an enterprise when there is power: *Creditor -* shall refer to a natural or juridical person which has a claim against the debtor that arose on or before the commencement date. *Date of liquidation* - shall refer to the date on which the court issues the Liquidation Order. *Days* - shall refer to calendar days unless otherwise specifically stated in this Act. ***Debtor*** - shall refer to, unless specifically excluded by a provision of this Act, a sole proprietorship duly registered with the Department of Trade and Industry (DTI), a partnership duly registered with the Securities and Exchange Commission (SEC), a corporation duly organized and existing under Philippine laws, or an individual debtor who has become insolvent as defined herein. BUT the term **debtor does not include the following:** **national and local government agencies or units.** *Encumbered property* - shall refer to real or personal property of the debtor upon which a lien attaches. *General unsecured creditor* - shall refer to a creditor whose claim or a portion thereof its neither secured, preferred nor subordinated under this Act. ***Group of debtors*** - shall refer to and can cover only: ***Individual debtor*** - shall refer to a natural person who is a resident and citizen of the Philippines that has become insolvent as defined herein. *Insolvent* - shall refer to the financial condition of a debtor that is generally unable to pay its or his liabilities as they fall due in the ordinary course of business or has liabilities that are greater than its or his assets. ***Insolvent debtor\'s estate*** - shall refer to the estate of the insolvent debtor, which includes all the property and assets of the debtor as of commencement date, plus the property and assets acquired by the rehabilitation receiver or liquidator after that date, as well as all other property and assets in which the debtor has an ownership interest, whether or not these property and assets are in the debtor\'s possession as of commencement date: *Provided,* That trust assets and bailment, and other property and assets of a third party that are in the possession of the debtor as of commencement date, are excluded therefrom. *Involuntary proceedings* - shall refer to proceedings initiated by creditors. *Liabilities* - shall refer to monetary claims against the debtor, including stockholder\'s advances that have been recorded in the debtor\'s audited financial statements as advances for future subscriptions. ***Lien*** - shall refer to a statutory or contractual claim or judicial charge on real or personal property that legality entities a creditor to resort to said property for payment of the claim or debt secured by such lien. *Liquidation* - shall refer to the proceedings under Chapter V of this Act. *Liquidation Order* - shall refer to the Order issued by the court under Section 112 of this Act. *Liquidator* - shall refer to the natural person or juridical entity appointed as such by the court and entrusted with such powers and duties as set forth in this Act: *Provided,* That, if the liquidator is a juridical entity, it must designated a natural person who possesses all the qualifications and none of the disqualifications as its representative, it being understood that the juridical entity and the representative are solidarity liable for all obligations and responsibilities of the liquidator. *Possessory lien* - shall refer to a lien on property, the possession of which has been transferred to a creditor or a representative or agent thereof. *Rehabilitation* - shall refer to the restoration of the debtor to a condition of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated. *Rehabilitation receiver* - shall refer to the person or persons, natural or juridical, appointed as such by the court pursuant to this Act and which shall be entrusted with such powers and duties as set forth herein. *Rehabilitation Plan* - shall refer to a plan by which the financial well-being and viability of an insolvent debtor can be restored using various means including, but not limited to, debt forgiveness, debt rescheduling, reorganization or quasi-reorganization, dacion en pago, debt-equity conversion and sale of the business (or parts of it) as a going concern, or setting-up of new business entity as prescribed in Section 62 hereof, or other similar arrangements as may be approved by the court or creditors. *Secured claim* - shall refer to a claim that is secured by a lien. *Secured creditor* - shall refer to a creditor with a secured claim. *Secured party* - shall refer to a secured creditor or the agent or representative of such secured creditor. *Unsecured claim* - shall refer to a claim that is not secured by a lien. *Unsecured creditor* - shall refer to a creditor with an unsecured claim. *Voluntary proceedings* - shall refer to proceedings initiated by the debtor. ***REHABILITATION*** Rehabilitation refers to the restoration of the debtor to a condition of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated. **What is the purpose of rehabilitation proceedings?** 1. Corporate rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency. 2. Rehabilitation proceedings have a two (2)-pronged purpose, namely: **What are the types of rehabilitation proceedings?** 1. Court supervised a. voluntary - initiated by the debtor (Sec. 12) b. involuntary - initiated by creditors (Sec. 13) 2. Pre-negotiated (Sec. 76) 3. Out of court or informal (Sec. 83) **COURT SUPERVISED REHABILITATION** **A. VOLUNTARY REHABILITATION** **What is voluntary rehabilitation?** It is one which is initiated by the debtor. **Who initiates:** Insolvent debtor 1\. owner in case of a sole proprietorship 2\. majority of the partners in case of a partnership **How initiated:** filing a petition for rehabilitation with the court **Contents of the petition:** It shall establish the insolvency of the debtor and the viability of its rehabilitation, and include the following: **B. INVOLUNTARY REHABILITATION** **What is involuntary rehabilitation?** It is one which is initiated by the creditor **Who initiates:** Any creditor or group of creditors with a claim of, or the aggregate of whose claims is, at least One Million Pesos (Php1,000,000.00) or at least twenty-five percent (25%) of the subscribed capital stock or partners\' contributions, whichever is higher **How initiated:** filing a petition for rehabilitation with the court if: **Contents of the petition:** It shall establish the substantial likelihood that the debtor may be rehabilitated, and include: **PROVISIONS COMMON TO BOTH VOLUNTARY AND INVOLUNTARY REHABILITATION** **When does rehabilitation proceeding commences?** It shall commence upon the issuance of the Commencement Order. **What is a commencement order and its contents?** It is an order issued by the court which after it finds the petition to be sufficient in form and substance and shall include the following: ***What are the effects of a Commencement Order?*** *1. **The*** **effects of a Stay or Suspension Order**: ***Exceptions to the Stay or Suspension Order.* ** The Stay or Suspension Order shall not apply: ***Effectivity of Commencement Order.*** Unless lifted by the court, the Commencement Order shall be for the effective for the duration of the rehabilitation proceedings for as long as there is **a substantial likelihood** that the debtor will **be successfully rehabilitated.** ***Who may be a rehabilitation receiver?*** 1\. Natural, or ***What are the Powers, Duties and Responsibilities of the Rehabilitation Receiver?*** The rehabilitation receiver shall be deemed an officer of the court with the principal duty of **preserving and maximizing the value of the assets of the debtor** during the rehabilitation proceedings, determining the **viability** of the rehabilitation of the debtor, preparing **and recommending a Rehabilitation Plan** to the court, and **implementing** the approved Rehabilitation Plan, The rehabilitation receiver shall have the following powers, duties and responsibilities: **May a rehabilitation receiver be removed?** Yes. The rehabilitation receiver **may be removed** at any time by the court either *motu proprio *or upon motion by any creditor/s holding more than fifty percent (50%) of the total obligations of the debtor, on such grounds as the rules of procedure may provide which shall include, but are not limited to, the following: **May the rehabilitation receiver assume the management of the debtor under receivership?** Yes. Upon motion of any interested party when there is: In the **alternative** the court may appoint a management committee that will undertake the management of the debtor instead of appointing the rehabilitation receiver. **What is a Rehabilitation Plan?** Rehabilitation Plan shall refer to a plan by which the financial well-being and viability of an insolvent debtor can be restored using various means including, but not limited to, debt forgiveness, debt rescheduling, reorganization or quasi-reorganization, dacion en pago, debt-equity conversion and sale of the business (or parts of it) as a going concern, or setting-up of new business entity as prescribed in Section 62 hereof, or other similar arrangements as may be approved by the court or creditors. ***What are the contents of a Rehabilitation Plan?*** The Rehabilitation Plan shall contain, as a minimum: ***What is the period for Confirmation of the Rehabilitation Plan?***  The court shall have a maximum period of one (1) year from the date of the **filing of the petition to confirm a Rehabilitation Plan**. **May rehabilitation be converted to liquidation proceedings?** Yes. During the pendency of court-supervised or pre-negotiated rehabilitation proceedings, the court may order the conversion of rehabilitation proceedings to liquidation proceedings pursuant to \(a) Section 25(c) \(b) Section 72 \(c) Section 75 \(d) Section 90 (e ) Section 91 ***What are the effects of Confirmation of the Rehabilitation Plan?*** The confirmation of the Rehabilitation Plan by the court shall result in the following: **PRE-NEGOTIATED REHABILITATION** **What is pre-negotiated rehabilitation?** **It is one filed by the debtor alone or together with creditor seeking the approval of a pre-negotiated rehabilitation plan.** **Who initiates:** An insolvent debtor, by itself or jointly with any of its creditors, may file a verified petition with the court for the approval of a pre-negotiated Rehabilitation Plan which has been endorsed or approved by creditors holding at least two-thirds (2/3) of the total liabilities of the debtor, including secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor. **How initiated:** filing a petition for rehabilitation **Contents of the petition.** \[PRE NEGOTIATED\] The petition shall include as a minimum: **OUT-OF-COURT OR INFORMAL RESTRUCTURING AGREEMENTS** **OR REHABILITATION PLANS** **What is an out-of-court or informal restructuring agreements or rehabilitation plan?** An out-of-court or informal restructuring agreements or rehabilitation plan must meet the following requirements in order to be valid: **What is *Cram Down Effect?*** Cram-down is the power of the rehabilitation court to approve and implement a rehabilitation plan notwithstanding the objection of the majority of creditors. As noted in the case of *Bank of the Philippine Islands vs. Sarabia Manor Hotel Corporation* (G.R. No. 175844, 29 July 2013), the "cram-down" clause, which is currently incorporated in Section 64 of *Republic Act No. 10142*, also known as the *Financial Rehabilitation and Insolvency Act (FRIA) of 2010*, "is necessary to curb the majority creditors' natural tendency to dictate their own terms and conditions to the rehabilitation, absent due regard to the greater long-term benefit of all stakeholders. Otherwise stated, it forces the creditors to accept the terms and conditions of the rehabilitation plan, **preferring long-term viability** over immediate but incomplete recovery." Section 64 reads: **Section 64**. *Creditor Approval of Rehabilitation Plan*. -- The **rehabilitation receiver** [shall **notify the creditors** and stakeholders that the Plan is ready for their examination]. [**Within twenty (20) days** from the said notification], the rehabilitation receiver shall convene the creditors, either as a whole or per class, for purposes of **voting on the approval of the Plan**. The Plan shall be deemed rejected unless approved by all classes of creditors whose rights are adversely **modified or affected by the Plan**. For purposes of this section, the Plan is **deemed to have been** **approved** by a class of creditors if members of the said class holding **more than** fifty percent **(50%)** of the total claims of the said class vote in favor of the Plan. [The votes of the creditors shall be based solely on the amount of their respective claims] based on the registry of claims submitted by the rehabilitation receiver pursuant to Section 44 hereof. **Notwithstanding the rejection** of the Rehabilitation Plan, the court may confirm the Rehabilitation Plan if all of the following circumstances are present: \(a) The Rehabilitation Plan [**complies** with the requirements] specified in this Act. \(b) The [rehabilitation receiver **recommends**] the confirmation of the Rehabilitation Plan; \(c) The shareholders, owners or partners of the [juridical **debtor lose at least their controlling interest**] as a result of the Rehabilitation Plan; and \(d) The Rehabilitation Plan [would likely **provide**] the objecting class of [creditors with **compensation** which has a **net present value greater**] than that which they would have received [if the debtor were under liquidation.] **READ: Marilyn Victorio-Aquino, Petitioner, vs. Pacific Plans, Inc. and Mamerto A. Marcelo, Jr. (Court-Appointed Rehabilitation Receiver of Pacific Plans, Inc.), Respondents; G.R. No. 193108; 10 December 2014** ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- **[LIQUIDATION OF INSOLVENT JURIDICAL DEBTORS]** **What are the recourse of an insolvent juridical debtor?** ***VOLUNTARY LIQUIDATION*** ***What is voluntary liquidation?** Initiated by an insolvent debtor* **Who initiates:** insolvent debtor may apply for liquidation **How initiated:** filing a petition for liquidation with the court **Contents of the petition.** The petition shall establish the insolvency of the debtor and shall contain the following: ***INVOLUNTARY LIQUIDATION*** ***What is involuntary liquidation?** Initiated by creditors* **Who initiates:** Three (3) or more creditors the aggregate of whose claims is at least either One million pesos (Php1,000,000,00) or at least twenty-five percent (25%) of the subscribed capital stock or partner\'s contributions of the debtor, whichever is higher **How initiated:** filing a petition for liquidation of the debtor with the court **Contents of the petition.** The petition shall show that: **[INSOLVENCY OF INDIVIDUAL DEBTORS]** **Who is an insolvent debtor?** Insolvent debtor refer to the financial condition of a person that is generally **unable to pay its or his liabilities** as they fall due in the ordinary course of business or has liabilities that are greater than its or his assets. **What are the recourse of an insolvent individual debtor?** **What is suspension of payment?** **When an** individual debtor who, **possessing sufficient property to cover all his debts but foreseeing the impossibility of meeting them** **when** they respectively fall **due**, may file a verified petition that he be declared in the state of suspension of payments. **Who initiates:** individual debtor **How initiated:** filing a petition by the individual debtor with the court **Contents of the petition.** \(a) schedule of debts and liabilities \(b) an inventory of assets, and \(c) a **proposed agreement with his creditors**. **When the court issues a suspension of payment order, what actions are suspended?** It suspends any pending execution against the individual debtor. **Is there any exception to the suspension of payment order?** Yes. **Properties held as security** by secured creditors shall not be the subject of such suspension order. Secured creditors are those with a secured claim or claims secured by a lien (i.e. mortgage) **Can a creditor still sue the debtor who filed a petition for suspension of payment?** **Yes. But only:** **How long does a suspension of payment order survive?** **Three (3) months or as soon as such agreement is denied.** **Voluntary Liquidation.** ***What is voluntary liquidation?** Initiated by an insolvent debtor* **Who initiates:** individual debtor whose **properties are not sufficient** to cover his liabilities, and **owing debts exceeding Php500,000.00** **How initiated: filing a verified petition** with the court of the province or city in **where he has resided for six (6) months prior** to the filing of such petition **Contents of the petition.** It shall contain a **schedule of debts and liabilities and an inventory of assets.** **Involuntary Liquidation.** ***What is involuntary liquidation?** Initiated by creditors* **Who initiates: Any creditor or group of creditors with a claim of, or with claims aggregating at least Five hundred thousand pesos (Php500, 000.00)** **How initiated:** filing a verified petition for liquidation with the court of the [province or city in which the individual debtor resides.] **Contents of the petition.** Petition for liquidation shall set forth or allege at least one of such acts: **PROVISIONS COMMON TO LIQUIDATION IN INSOLVENCY OF INDIVIDUAL AND JURIDICAL DEBTORS** *What is a liquidation order?* A Liquidation order is one which: ***What are the effects of the issuance of liquidation order against a juridical or individual debtor?*** **Does a liquidation order affect the rights of a secured creditor?** No. The Liquidation Order shall not affect the right of a secured creditor to enforce his lien in accordance with the applicable contract or law. **What are the options available to a secured creditor?** If the **secured** creditor **maintains** his rights under the security or lien: **Who is a liquidator?** *N*atural person or juridical entity appointed as such by the court and entrusted with such powers and duties as set forth in this Act: *Provided,* That, if the liquidator is a juridical entity, it must designated a natural person who possesses all the qualifications and none of the disqualifications as its representative, it being understood that the juridical entity and the representative are solidarity liable for all obligations and responsibilities of the liquidator. ***What are the qualifications of a Liquidator?*** The liquidator shall have the same qualifications as a rehabilitation receiver as follows: **How are liquidators chosen?** 1\. election 2\. court appointment **Who may elect a liquidator?** 2\. Creditors whose claims are not barred by the statute of limitations **Are secured creditors entitled to elect a liquidator?** No, except, when: \(a) he waives his security or lien; or **When can a court appoint a liquidator?** **How is a liquidator removed?** A liquidator may be removed any time by the court for cause, either *motu propio* or upon motion of any creditor entitled to vote for the election of the liquidator. ***What are the powers, duties and responsibilities of the liquidator?*** The liquidator shall be deemed an officer of the court with the principal duty of preserving and maximizing the value and recovering the assets of the debtor, with the end of liquidating them and discharging to the extent possible all the claims against the debtor. The powers, duties and responsibilities of the liquidator shall include, but not limited to: ***DUTIES:* to take control of the debtor's assets and claims and to settle** ***To recommend and engage qualified people to help as necessary*** In addition to the rights and duties of a rehabilitation receiver, the liquidator, shall have the right and duty to take all reasonable steps to manage and **dispose of the debtor\'s assets** with a view towards **maximizing the proceedings** therefrom, to **pay creditors** and stockholders, and to **terminate the debtor\'s legal existence**. Other duties of the liquidator in accordance with this section may be established by procedural rules. **In addition to the above powers and duties, what are the other duties of a liquidator? {record disbursements, quarterly report}** The liquidator **shall make and keep a record of all moneys received and all disbursements made by him or under his authority as liquidator**. He shall render a quarterly report thereof to the court, which report shall be made available to all interested parties. The liquidator shall also submit such reports as may be required by the court from time to time as well as a final report at the end of the liquidation proceedings. **What is a liquidation plan?** A plan submitted by the liquidator to the court setting forth the assets of the debtor and a schedule of liquidation of the assets and payment of the claims. ***May the assets of the debtor be sold to pay debts?*** *Yes.* The liquidator may sell the unencumbered assets of the debtor and convert the same into money. **How are properties sold?** Public auction. **May a private sale be allowed instead of public auction?** Yes. With the **approval of the court** if: \(b) the private sale is for the best interest of the debtor and his creditors. **May the property of the debtor be paid directly to the creditor instead of being sold?** Yes, but only with the approval of the court.